What SECURE Act 2.0 means for your retirement

Congress gave American workers a last-minute holiday gift: a set of new incentives to save more for retirement. Passed just before Congress adjourned, as part of the huge omnibus spending bill, the SECURE Act 2.0 increases limits on many retirement plans and creates a few new opportunities for workers to become more financially secure. Here are a few of the highlights:

Later RMDs. Every year, seniors must withdraw money from their retirement plans and pay taxes on all but Roth after-tax savings. For many years, the withdrawals started at age 70 ½. That was moved to age 72 in 2019. And now, starting in 2023, the withdrawal age will rise to 73 — and move to age 75 in 2033. (But if you already started taking withdrawals, you cannot stop.)

Catch-up contributions. Those over age 50 have always been allowed to make additional contributions to their IRA — currently an extra $1,000 over the regular contribution. (Next year, the regular contribution limit rises to $6,500.) But in the future, those catch-up contribution limits will be indexed to inflation.

There will be big increases in the allowable 401(k) and 403(b) contributions as well. Workers 50 and older are already allowed to put up to $6,500 extra into their 401(k) plans each year — for a total of $27,000. But starting in 2025, workers aged 60 to 63 will be able to make an additional contribution of up to $10,000 (or 50% more than the regular catch-up amount that year).

Auto-enrollment. When it comes to encouraging companies and individuals to put more money into retirement accounts, there are some new techniques and incentives. Employers with more than 10 workers that start new 401(k) plans in 2025 or later will be required to automatically enroll employees and have them set aside 3% to 10% of their earnings every year. Those who don’t want to participate would have to opt out.

And to encourage employers to set up these plans, there will be a 100% tax credit for employers — giving them up to $5,000 for the costs of starting a plan, and $1,000 per employee to match contributions to the plan.

Secure 2.0 also creates a “savers match” starting in 2027. The government will give workers with income under $35,500 ($71,000 for couples filing jointly) a 50% matching contribution of up to $1,000 per person, which must be invested in an IRA or employer’s retirement plan. Qualifying individuals get this match even if they don’t have a tax liability that year.

Emergency savings. Two new rules will make it easier to save for emergencies. The first, starting in 2024, allows emergency removal of up to $1,000 from a company retirement plan without the standard 10% penalty. The second allows creation of an emergency savings account linked to 401(k) plans. Workers could set aside up to 3% of their salary in these plans with after-tax dollars up to $2,500 per year. In an emergency, they could withdraw money tax-free and without paying the standard 10% penalty for money taken out before age 59 ½.

Part-time worker participation. Until now, part-time workers couldn’t participate in company retirement plans until they worked for their employer for three years, 500 hours a year or more (or after one year of working 1,000 hours). Now, starting in 2025, part-time workers can participate in 401(k) plans after working two years for the company.

Other provisions of SECURE 2.0 Act will require employers to make full and easier disclosure of the fees in their 401(k) plans, as well as the rules for doing a rollover or taking out a lump sum. And the government will create a database to make it easier for people (and their heirs) to track down missing retirement money they are owed.

These changes are complex. They are supposed to make retirement savings easier. But the political negotiations involved trade-offs for the revenue lost as people can set aside more pre-tax money during their working years — and postpone withdrawals longer into their older years. Some revisions may be yet to come. Still, the more you can save and the longer you can keep it growing, the better off you will be in retirement. And that’s the Savage Truth.